According to sources close to the situation, the Yahoo board plans to meet Sunday to decide whether to approve a $1.1 billion all-cash offer for New York-based blogging site Tumblr.

As AllThingsD.comfirst reported yesterday, Yahoo has been mulling some kind of deal with the hip New York-based blogging site, from a strategic investment to an outright acquisition. Sources said that the Silicon Valley Internet giant’s CEO Marissa Mayer has decided that buying Tumblr was going to be “the stake in the ground of what her strategy is going forward for Yahoo.”

And that is to attract younger audiences with just the kind of user-generated content Tumblr has pioneered to huge growth.

As with all big-time acquisition deals, this one could certainly fall apart at the last minute, but source said the agreement was still in place as of today. If approved by Yahoo’s board, it will be announced Monday. Yahoo has already said it has news to announce then.

According to numerous sources, Mayer started an intense focus on Tumblr about six weeks ago and determined quickly that the fast-growing content site, turbocharged by mountains of user-generated content, was just the kind of property that Yahoo needed to make it both “cool” and relevant to new audiences.

Yahoo is looking to undergird its strong set of existing media offerings to appeal to a different audience and also get into the social space via consumer-based software solutions that are both elegant and easy to use.

Tumblr’s mobile usage has also been strong, which also interested Mayer. While Tumblr started as a desktop-based service, its mobile usage has ramped up quickly in the last few years. ComScore says that a quarter of the service’s U.S. visitors now come from mobile devices.

At this price, it will be Mayer’s biggest acquisition so far. Since she became CEO last summer, Mayer has made only a series of small acquisitions of mobile startups.

Sources said that as part of the deal, founder and CEO David Karp would continue to operate the business, with Mayer promising him a level of autonomy, despite the need to integrate closely with Yahoo too. He will be locked in, sources said, via a four-year deal that will reward him for performance of the business.

Presumably, the Tumblr brand will continue.

The deal, if consummated will be a big win for investors. In a series of fundings since 2007, Tumblr has raised $125 million so far and is now at a reported valuation of $800 million. Investors include Spark Capital, Union Square Ventures, Sequoia Capital, Greylock Partners, Insight Venture Partners and the Chernin Group.

While Tumblr’s Karp has resisted various offers for the company over the years, Mayer spent a lot of time with him reassuring him of how Yahoo could turbocharge his business. He has also been searching for a COO to help him build out the infrastructure of its business, especially its advertising one.

And as Peter Kafka and I previously wrote, Tumblr could certainly bring Yahoo a big, young audience. Its worldwide traffic was at 117 million visitors in April, according to comScore. On its home page, Tumblr claims it has 107.8 million blogs and 50.6 billion posts. U.S. desktop traffic to Tumblr was 37 million in April, close to LinkedIn and Twitter, although Twitter obviously has much more via mobile.

But figuring out how to make money from that audience is a task that the company has only recently started to tackle.

Like other recent Web startups that have seen rocket ship growth — see: Twitter, Facebook — Tumblr resisted advertising for its formative years, and its user base seems particularly unwilling to accept standard banner ads. In addition, many industry observers think that Tumblr’s pages are packed with porn and/or other questionable content that would scare off advertisers.

But within the last year or so, Tumblr has started selling modestly sized “native ads” promoting brands’ Tumblr pages, on users’ “dashboards,” which has shown promise. Tumblr has said it had $13 million in revenue last year and sources said it could get to up to $100 million this year.

Tumblr has been represented by Qatalyst Partners’ Frank Quattrone, while Yahoo’s Mayer, as well as M&A head Jackie Reses and CFO Ken Goldman has been on the company’s side.

AllThingsD by Writer

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